A Turnaround in the Offing?

EQUINOMICS RESEARCH analyses the developments auguring well for a constructive progress in the construction sector within a year.
For the past two years, corporate earnings were subdued, the real estate and construction sectors slowed down and the capex of the infra and manufacturing sectors took a beating. While wholesale price-based inflation is in negative territory for the 17th month, banking credit growth hit as low as 7 per cent last year. The stock market, a barometer of the state of the economy with a lag, fell as much as 20 per cent, just before the Budget, from its peak last year. Two consecutive failures of monsoons, a slowdown in the aggregate demand in the system, a record proportion of corporate lending becoming bad assets and significant signs of global deflation hit the domestic economy and, thereby, the stock markets.

However, optimism is slowly emerging on the domestic economic front. Fear of global deflation has receded to some extent - the crude oil price has already bounced back a little more than 60 per cent from its 12-year record low. Prices of many other resources like iron ore, metals, etc, started improving. The Baltic Dry Index, an indicator of shipping freights, has already doubled from its record low. And, thanks to improvements in resource prices, China's exports bounced back to 18 per cent year-on-year in March.

The positives
On the domestic front, both foreign agencies (from Europe and South Korea) and the Indian Meteorological Department have predicted a normal monsoon this year. On the external economic front, except exports of goods (year-on-year growth is in still the negative zone), most indicators are turning highly positive:

India's short-term external debt has fallen to 17 per cent of total foreign debt as on December 31, 2015, from 23.6 per cent at the end of FY2013. For five years, since end-FY2010 till the end of FY2014, short-term external debt accounted for around 20 per cent of overall overseas borrowings. Overall external debt also moved up just 1 per cent (by $4.9 billion) to $480.2 billion from March to December 2015.
Foreign exchange reserves touched a new lifetime high of about $360 billion during the week ended April 8.
FDI increased by 27.5 per cent year-on-year to $42 billion from April to February FY2016, as against $32.96 billion in the corresponding period of the previous year.
Further, Saudi Arabia promised more investments in India's infrastructure projects during the recent visit of Prime Minister Narendra Modi. Saudi Arabia is planning to set up the world's largest sovereign wealth fund of around Rs 132 lakh crore.
Japan has committed $34 billion investment in India and the UAE has committed $75 billion as its investment target for India in the long term. Japanese companies have piled up cash at record levels in the December 2015 quarter. According to the Bank of Japan, corporate assets in cash and deposits reached a record high of $2.2 trillion, rising for the 29th consecutive quarter.
The current account deficit (CAD) of the balance of payments has also narrowed down substantially, thanks to the oil price crash. Although the oil price has bounced back over 60 per cent from its record level, it is still 60 per cent cheaper than its 2014 high of $115 per barrel.

Within the domestic economy, too, several positive signs are emerging û saving on the oil import bill and the government's bold decision to retain a major part of the gains in the form of significant hikes in duties on fuels, has enabled it to improve the fiscal balance in a tight economic environment. Apart from achieving the fiscal deficit target, here are some other favourable data points:
Indirect tax collections moved up by 31.1 per cent to Rs 7.11 lakh crore in FY2016 over FY2015, while direct tax collections increased only by 7.61 per cent to Rs 7.52 lakh crore during the same period. This is a welcome development for the economy because such robust indirect tax collections partly reflect the improvement in the aggregate demand in the system.

The country's core sector output grew at 5.7 per cent in February, the highest since November 2014, owing to a sharp pickup in natural gas, refinery products, fertiliser, cement, and electricity generation. The eight sectors (coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity), comprising nearly 38 per cent of India's total industrial production, had grown at 2.3 per cent in February last year.

Growth in the Index of Industrial Production (IIP), a broader measure of industrial economy, bounced back into the positive zone in February, reversing three months of contraction. The IIP rose 2 per cent in February from a year ago, compared to 1.5 per cent decline in the previous month, owing to a strong performance by the mining and electricity sectors.

Banking credit grew in double digits for the 6th fortnight in a row at 11 per cent in March 2016.

Buoyed by a pickup in demand, India's 12 major ports saw cargo traffic increase by 4.18 per cent to 549.98 million tonne (mt) during the April-February period of the current fiscal.

India's fuel consumption grew nearly 11 per cent in FY2016 to 185 mt from 165.5 mt in FY2015 on the back of rising automobile sales and a rebound in manufacturing activities. This is the fastest growth in more than a decade and higher than 7.2 per cent growth in China's consumption of fuel.

Of key interest
In April, the RBI lowered its key interest rate for the first time in six months. The benchmark repurchase rate was cut to 6.5 per cent from 6.75 per cent, the lowest since March 2011. With this, the central bank has reduced policy rates by 150 basis points since the start of the accommodative cycle. Wholesale prices in the country fell for the 17th straight month in March, dropping (-) 0.85 per cent compared to (-) 0.91 per cent in February.

With a possible good monsoon, it is likely that the benchmark interest rate would fall further significantly.

Projects commissioned
Projects commissioned in the country reached a record high of Rs 4.6 lakh crore, according to CMIE, in FY2016. This is the highest ever commissioning of projects in a year and represents a 12 per cent increase over Rs 4 lakh crore in FY2015.

The stock of projects on hand is also huge û total outstanding projects are worth Rs 159 lakh crore. Of these, Rs 92 lakh crore worth of projects are estimated to be under implementation. With these new projects, along with a low interest rate regime and the government's initiatives on rural spend, smart cities, roads projects, thrust on PSU capex and development of five new ports (at a cost of about Rs 25,000 crore), we can hope to see a significant spurt in India's GDP growth and the aggregate demand in the system. Further, the disbursement on account of the implementation of OROP and 7th Pay Commission, which would infuse additional liquidity of Rs 10,000 crore and Rs 100,000 crore in the system, will further boost aggregate demand. These developments indeed augur well for the constructive progress in the construction sector within a year.

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